Implied Volatility represents the expected future volatility of a stock over the life of an option. It is the most crucial variable in options pricing. When IV is high (during earnings, market crashes, or macroeconomic events), option premiums inflate significantly. When IV is low, premiums shrink.
Option wheel strategy traders aim to sell puts and calls when IV is elevated to collect richer premiums. This exploits the fundamental edge that implied volatility generally overestimates actual realized volatility — a phenomenon known as the Volatility Risk Premium.
IV Rank (IVR) and IV Percentile (IVP) are two important derived metrics. IVR tells you where current IV sits relative to its 52-week range (0-100). An IVR above 50 is generally considered "elevated" and favorable for selling options. IVP is similar but measures the percentage of days in the past year where IV was lower than today.
IV Crush: After a binary event like an earnings announcement, IV typically drops sharply — this is called an IV crush. Option sellers benefit from this because the options they sold become cheaper to buy back.
Examples of Implied Volatility (IV) in Action
- 1A stock with 60% IV will offer double or triple the premium for a cash-secured put compared to a stock with 20% IV at the same delta.
- 2NVDA going from 40% IV to 80% IV before earnings — a wheel trader can collect 2× the normal premium by selling a put right before the announcement.
- 3An IV Rank of 80 means current IV is in the top 20% of its annual range — a strong signal to sell premium.